MBS LUNCH: Liquidity Drying Up Ahead of Auction
I dont want to say its been a terribly slow morning--there has actually been a pretty decent pace to morning price action in futures trading--however at this point I think its safe to say market liquidity is drying up as participants prepare their positions ahead of the start of the FOMC meeting this afternoon (and the 3 yr note auction).
So far 575,000 SEPT 10 yr TSY contracts have been traded. After a sizable move higher in price the 10 yr contract lost steam when bids crossed over 116-04. Profit taking took place at 116-07 as market participants squared up positions...notice the spike in volume? Since I know many of you follow yield and not futures prices...the cash market 10 yr TSY note is yielding 3.70%.
Here it is longer term significance of that price point....
Although the 10yr contract has received a fair amount of attention this morning, the market has been more enthralled with the long end of the curve...where there are higher yields! Looks like the recent run up in rates pushed yields high enough to draw in some rate lockers...yield chasers! This could be considered "buying on weakness". Check out the volume spike in the long bond contract. Open interest is also higher...signalling new money is coming into the market and this isnt just a short covering rally. That is a positive indication for the market...signals strong price support when yields move higher (FOR LONGER DURATION DEBT).
The morning rally appears to have reached a cap in rate sheet influential MBS coupons too. I would be lying if I said there was anything of interest happening in the MBS market this morning though...this rally has been a function of higher benchmark prices and lower benchmark yields
HMMMM....looky there...selling momentum has stalled in stocks. I wonder if the sputtering rally in rates is related to the pause in equities? (NOTE SARCASM).
If you were wondering...GNMA TRADERS DO NOT CARE ABOUT THE OP-ED PUBLISHED IN THE JOURNAL THIS MORNING. We all know about the loans the FHA writes...this is of no surprise to anyone working in the industry...regardless of whether or not GNMA's portfolio is bigger.
3 yr note auction results will be released at 1pm.Here is a look at the recent auction history...
This auction offers $2 billion more than the July refunding. July's auction was stopped out at 1.519%. Compared to that auction the "when issued" current 3 yr note yield is trading at 1.728%...20.9 basis points cheaper. In last month's auction...demand tapered off a bit but was still relatively high. REMINDER: the market has shown more demand for higher yielding, longer maturity debt lately. Not saying this is a bad omen, especially with stocks losing momentum...just be ready for anything (I hate trying to predict the outcome of auctions).